What the Trump 401(k) rule lets you do

The Trump administration created a rule that allows first-time homebuyers to withdraw up to $35,000 from their 401(k) without the usual 10% early withdrawal penalty. The withdrawal must go toward a down payment, closing costs, or other may have access to home-purchase expenses. You do not have to repay the money — it is a permanent withdrawal, not a loan.

This rule applies only to first-time homebuyers, defined as someone who has not owned a primary residence in the past two years. The $35,000 limit is per person, so a married couple could each withdraw $35,000 if both are first-time buyers. The money comes out of your 401(k) account before taxes, meaning you will owe income tax on the full amount withdrawn in the year you take it out.

Key Takeaways

  • First-time homebuyers can withdraw up to $35,000 from a 401(k) without paying the standard 10% early withdrawal penalty.
  • You must pay ordinary income tax on the full amount withdrawn in the year you take the money out.
  • The withdrawal is permanent — you do not repay it like a 401(k) loan.
  • Your 401(k) plan must offer this option; not all plans do, so you need to check with your plan administrator first.
  • The money must be used for a down payment, closing costs, or other direct home-purchase expenses within 120 days of withdrawal.

How much tax you will owe on the withdrawal

When you withdraw $35,000, you pay income tax on that amount at your ordinary tax rate. If you are in the 22% federal tax bracket, you would owe roughly $7,700 in federal tax alone. State income tax may apply on top of that, depending on where you live. Some states do not tax retirement withdrawals, while others tax them at the full state income tax rate.

The tax is withheld automatically from your 401(k) distribution, but it may not be enough to cover your full tax bill. You could end up owing more when you file your tax return the following year. Before you withdraw, use a tax calculator or speak with a tax professional to estimate what you will actually owe, so you are not surprised at tax time.

Which 401(k) plans allow this withdrawal

Not every 401(k) plan offers the first-time homebuyer withdrawal option. Your employer's plan must have adopted this rule for you to use it. You need to contact your plan administrator — usually the HR or benefits department at your workplace — and ask whether your specific plan allows first-time homebuyer withdrawals.

If your plan does not offer it, you cannot make this withdrawal, even though the rule exists. If you have changed jobs, you may have multiple 401(k) accounts from previous employers. Each plan is separate, so you would need to check each one. Some people roll old 401(k)s into their current plan to consolidate, which can make the withdrawal process simpler if the current plan allows it.

The 120-day rule and how to use the money

Once you withdraw the funds, you have 120 days to use them for a may have access to home purchase. may have access to expenses include the down payment, closing costs, appraisal fees, title insurance, and other costs directly tied to buying the home. You cannot use the money for repairs, renovations, or moving costs after you buy the house.

You must document how you spent the money. Keep receipts, closing statements, and any other proof that the funds went toward the home purchase. If you do not use the money within 120 days or use it for something other than a may have access to expense, the IRS may treat it as a regular early withdrawal and impose the 10% penalty on top of income tax.

How this compares to a 401(k) loan

A 401(k) loan is different from this withdrawal. With a loan, you borrow from your own 401(k) and repay it over time, usually five years. You pay yourself back with interest, so the money stays in your retirement account. With the first-time homebuyer withdrawal, the money is gone permanently and you owe income tax on it.

A 401(k) loan does not trigger income tax or the early withdrawal penalty, which sounds better. However, if you leave your job, you typically must repay the loan within 60 days or it becomes a taxable withdrawal. The homebuyer withdrawal is simpler if you are certain you will not need that money for retirement, because there is no repayment obligation and no risk of a sudden tax bill if you change jobs.

Steps to withdraw money for your down payment

First, contact your 401(k) plan administrator and confirm that your plan allows first-time homebuyer withdrawals. Ask for the withdrawal form and any documentation you need to provide. You will likely need to prove you are a first-time homebuyer — this usually means a signed purchase agreement or letter from a real estate agent confirming you have not owned a home in the past two years.

Complete the withdrawal form and submit it with your documentation. The plan administrator will process the request, which typically takes one to two weeks. The funds will be sent to you, usually by check or direct deposit. You then have 120 days to use the money for the home purchase. After closing, keep all closing documents and receipts in case the IRS asks for proof that the money was used as stated.

Frequently Asked Questions

Can I withdraw from a Roth 401(k) using this rule?

Yes, if your plan offers a Roth 401(k) option, you can withdraw from it under the same rules. However, the tax treatment differs slightly. Contributions you made to a Roth 401(k) come out tax-free, but earnings on those contributions are taxed as ordinary income when withdrawn.

What if I am married and my spouse is not a first-time homebuyer?

Only the spouse who qualifies as a first-time homebuyer can make this withdrawal. The other spouse cannot withdraw under this rule. Each person's status is determined separately based on whether they owned a home in the past two years.

Can I withdraw this money if I am buying a second home or investment property?

No. The rule applies only to primary residences. A second home, vacation home, or rental property does not may have access to. The home must be where you intend to live as your main residence.

What happens if I do not use all $35,000 within 120 days?

Any unused portion is treated as a regular early withdrawal subject to the 10% penalty plus income tax. For example, if you withdraw $35,000 but only use $25,000 for the home purchase, the remaining $10,000 would be penalized. Plan your withdrawal amount carefully based on your actual down payment and closing costs.

Can I make this withdrawal from an old 401(k) at a previous employer?

Yes, if that plan allows it. You would need to contact the administrator of the old plan directly. Some people find it easier to roll the old 401(k) into their current employer's plan first, then withdraw from the current plan, but this depends on whether the current plan accepts rollovers and allows the homebuyer withdrawal.